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One of the biggest advantages of running a limited company in the UK is that it works as a dedicated/separate legal entity from its directors or owners. However, because of this separation, there are specific rules around how directors can take money out of the company’s account.
One such area that directors need to understand clearly is the Director’s Loan Account (DLA). It can be a bit confusing at first, so in this blog, we’ll break it down—what a DLA is, how it works, and what the tax implications are.
What is a Director’s Loan Account?
A DLA is a financial record that tracks the money exchanged between a company and its directors, excluding salary, dividends, or expense reimbursements. Since the company is a separate legal entity, any money a director takes out (other than through official means like salary or dividends) is treated as a loan.
Key Things to Remember:
- DLAs don’t include salary or dividends paid to directors.
- They can cover business expenses paid personally by the director, which are later reimbursed.
- They also record any money a director lends to or borrows from the company.
Every time a director takes or repays money, the transaction is recorded in their individual Director’s Loan Account. Each director in the company will have their own separate DLA.
How Are the Transactions Shown in a Director’s Loan Account?
There are two key points to understand:
- When a director takes money out of the company (other than salary or dividends), it’s recorded as a loan to the director.
- When a director puts personal money into the company, it’s recorded as a loan to the company.
Simply put, a director’s loan account tracks two main things: any personal withdrawals made by a director from the company (excluding salary and dividends), and any personal funds the director deposits into the company, whether as a loan or a repayment. These transactions usually happen via bank transfers between the company’s account and the director’s personal account.
Interpreting the Director’s Loan Account
- If the DLA shows a positive balance, it means you owe money to the company. This is a debit situation.
- If the DLA shows a negative balance, it means the company owes you money. This is a credit situation.
In short:
- A debit balance means you’ve borrowed more than you’ve paid back.
- A credit balance means you’ve put more into the company than you’ve taken out.
DLA: If I Take a Loan, What Can I Use It For?
You can use the loan money for almost any personal purpose. This could be anything from going on a holiday to repairing or buying a car. However, it’s important to remember that every loan you take from the DLA has tax implications. That’s why it’s best to repay these loans as soon as possible, and ideally, only use them occasionally.
Is There an Upper Limit to the Loan I Can Take from a Director’s Loan Account?
There’s no official upper limit on how much you can borrow from the DLA. However, keep the following points in mind:
- If you borrow more than what the company can comfortably afford, it may affect its cash flow.
- If the loan exceeds £10,000 at any time, HMRC will consider it as a Benefit in Kind (BiK).
- Depending on how much you borrow and how frequently, you or the company may need to pay tax.
When Should I Repay the Loan?
Ideally, you should repay the loan within the same accounting year. If the loan isn’t repaid within this timeframe, either the director or the company may be liable to pay tax on it.
Can I Pay Off the Director’s Loan with Dividends?
Yes. If you’re both a director and a shareholder, you can repay your director’s loan using dividends, provided the company has made enough profit to declare them.
Let’s understand this with an example:
If your DLA shows a debit balance of £2,000, it means you owe the company £2,000. You can either repay the money directly or clear the amount using your dividend. Suppose the company announces a dividend of £3,000—then £2,000 of that would first be used to pay off your DLA, and the remaining £1,000 would be transferred to your personal bank account.
Tax on Director’s Loan Account
The tax you or your company may need to pay on a director’s loan depends on the loan amount and when it is repaid. Either the director or the company — or both — could be liable for tax, depending on the circumstances.
If the director’s loan exceeds £10,000 at any point during the financial year, HMRC treats it as a Benefit in Kind (BiK). This is sometimes referred to as a P11D benefit, since it can be reported either via a P11D submission or through the company payroll.
- You, as the director, will be liable to pay income tax on the value of the benefit.
- The company must pay Class 1A National Insurance contributions, since it is treated as an employer benefit.
If the loan is less than £10,000, there may still be tax implications depending on when it’s repaid. Here are the key scenarios:
- Case 1: The loan is repaid within the same accounting period – generally, no tax is due.
- Case 2: The loan is repaid after the accounting period ends but within 9 months – the company avoids extra tax, but must still report the transaction.
- Case 3: The loan is not repaid within 9 months & 1 day post the accounting period ends – the company must pay Section 455 tax at 33.75% of the outstanding loan. This tax is reclaimable only when the loan is repaid.
- Case 4: The company is liquidated or chooses to write off the loan – the written-off amount is treated as income for the director and taxed accordingly.
Let’s learn these four cases in detail.
Case 1: It is within the same accounting period when you took the loan
No Corporation Tax applies if the director’s loan is paid off in the same accounting period. You will not need to show it in the Company Tax Returns. The accounting period is the duration as per the Company Tax Return.
You can withdraw the money later, but you will need to follow certain rules so that there is hardly any risk of tax avoidance. Remember, companies must pay a special rate of Corporation Tax — known as Section 455 (S455) tax — on the outstanding balance of a director’s loan if it isn’t repaid within nine months after the end of the accounting year in which the loan was taken.
If you pay back £5,000 or more to the DLA, another loan over and above this amount in the next 30 days will attract Corporation Tax at 33.75%.
Case 2: After the accounting period ends, but within nine months of the end of the period
If you missed repaying the director’s loan within the same accounting period, however, you repay within nine months of the year-end, you will need to account for it during the year-end on your Company Tax Return. However, the company will not be required to pay Corporation Tax.
There are two exceptions where your limited company will need to pay the Section 455 charge. It is known as a special Corporation Tax rate. The rate is 33.75%. However, the tax can be claimed back when the original loan is paid. The interest charged is not reclaimable.
- If the original loan was over £5,000 and you took out another loan of £5,000 or more within 30 days before or after repaying it.
- If the loan exceeded £15,000 and, at the time of repayment, you had already arranged to borrow again from your director’s loan account.
Case 3: If the loan is not repaid after nine months after the end of the period
In this case, the amount has to be shown on the Company Tax Return. The company will pay S455 Corporation Tax at the rate of 33.75%. Until the Corporation Tax is paid, interest will be charged by HMRC. The tax is reclaimable, but not the interest. However, reclaiming S455 tax is a time-consuming process.
Case 4: If the company goes into liquidation or writes off the loan
If the company goes into liquidation or decides to write off the director’s loan, HMRC will treat the loan as income. This means you will need to pay Income Tax and Class 1 National Insurance on the written-off amount, as it is considered earnings.
The company will report the written-off loan through payroll and deduct Income Tax and employee National Insurance. It will also need to pay the employer’s National Insurance on the same amount.
This will be treated as employment income and must be shown on your Self-Assessment.
Is it possible to lend money to my company?
Yes, the director’s loan account can be used to lend money to the company. This money can help start the business or fund the company’s growth.
Will my company be required to pay tax on money I lend to it through a director’s loan?
No, your limited company does not pay Corporation Tax on money you lend to it via your director’s loan account.
You can withdraw the money later, but if your account becomes overdrawn at the end of the financial year, there may be tax implications.
You may also choose to charge the company interest on the loan. However, doing so may also trigger certain tax consequences.
Need help managing your director’s loan account or understanding the more details of how it works and the related tax rules? Contact experts at Cangaf .
Further reading and official guidance
More guides and tools from our team:
- Withdrawing funds from a limited company
- Director salary and dividends strategy
- UK dividend tax explained
Official guidance from HMRC and GOV.UK:
